If you've never heard of Getco, here's why it's time to get to know this privately held firm. Chicago-based Global Electronic Trading is a high-frequency trader that controls between 10% and 20% of daily stock trading in the U.S. And it's systematically capturing the Securities and Exchange Commission -- most recently by adding another former senior SEC official to its roster.
Elizabeth King, who served as associate director of the SEC's division of trading and markets, is the latest former regulator to join Getco's advisory team, Dow Jones has reported. That group also includes former Federal Reserve Governor Randall Kroszner, as of March, and former SEC Chairman Arthur Levitt -- the very SEC head who during his tenure pushed through Reg NMS (National Market System) that facilitated the emergence of alternative trading systems and put high-frequency traders in business.
High-frequency traders like Getco control 70% of daily stock-trading volume. Proponents say that they improve liquidity in markets, reduce trading costs and narrow bid-ask spreads (from 6.25 cents to a penny).
Trying to Curb Abuses
Critics argue that high-frequency traders engage in barely legal insider trading by using fraction-of-a-second timing advantages to pick investors' pockets by about $3 billion every year, in inflated stock prices. And the decision by high-frequency traders to suddenly halt their activity on May 6 may have helped precipitate the "flash crash" that wiped out nearly 1,000 points on the Dow Jones Industrial Average in about 20 minutes.
On June 11, the SEC announced that it would curb what it perceives as abuses by high-frequency traders. As one of the largest such firms, Getco is, to say the least, a big player. It was valued at $1.5 billion when it raised $300 million in private equity in 2007 in exchange for a 20% stake. And it generated an estimated $400 million in 2008 profit and employed 250 people in 2009, according to The Wall Street Journal.
But just how much progress can the SEC make against leading high-frequency trading firms like Getco when the agency's former leaders are on Getco's payroll?
Positioned to Spill the Beans
Senator Ted Kaufman (D-Del.) responded to the King hiring with outrage: "This is another example of regulatory capture at its worst. It is one thing for Wall Street firms to hire SEC staff for their general knowledge and expertise. It is quite another, however, when the leading high-frequency trading firm, Getco, reaches into the SEC's Division of Trading and Markets and hires a senior official who presumably has been close to, or perhaps substantially involved in, a major ongoing Commission review of a broad range of market structure and high-frequency trading issues in the equity markets -- a review that should lead to additional rule-makings that will have a direct bearing on Getco's trading strategies."
While King must recuse herself from representing Getco in front of the SEC for a year, she is now ideally positioned to spill the beans on the SEC's goals and tactics for reining in high-frequency trading firms. What's next, the head of the Drug Enforcement Administration defecting to a big Colombian drug cartel? King's switch will likely make it harder for SEC Chairwoman Mary Schapiro to achieve her aims.
Getco's co-founders' stake is probably worth twice that 2007 valuation by now. While King's pay at her new job is unknown, it would be surprising only if it weren't far higher than her SEC salary. Getting a much-better-paying job at a private firm after leaving the SEC has to be a huge temptation for all but the most public-service-oriented staffers.
For those who advocate on behalf of the majority of America's small investors, Getco's regulatory capture doesn't bode well for the hope of formulating reforms of high-frequency trading that have teeth.
Introduction to Preferred Shares
Learn the difference between preferred and common shares.View Course »